Ed Yardeni: I think earnings are going to grow. I don’t see the freefall in earnings that we got during the lockdowns or great financial crisis. The problem is valuation multiples are still high. But I do think we’ll be making new highs by the end of next year, something around 4,800 [for the S&P 500, closed Friday 4.076]. But I think the valuation multiples are going to continue to be problematic.
Phil Rosen, senior reporter Business Insider: What are the biggest risks the US economy is facing right now?
Ed Yardeni president of Yardeni Research: For the past year or so, the main issue for the US economy is inflation. Inflation was deemed by the Fed, and to a large extent by most people, as being transitory.
Back in 2021, when it first started to rear its ugly head, and it kind of made sense, we had a tremendous demand shock as a result of the excessively stimulative fiscal and monetary policies back in 2020.
And geopolitical risk I’d say is probably number two. The world just isn’t a safe place these days. We’ve got things boiling in Russia and Ukraine, things coming to a boil in China. There’s a Cold War between the United States and China that’s been heating up. Iran is experiencing social turmoil.
If inflation actually goes up because of another round of geopolitical stress and supply chains and so on, then clearly the Fed would have to raise interest rates further.
The recession warning of inverted yield curves has been flashing. What is your recession outlook?
EY: This time around yield curves may not be predicting a credit crunch in a recession, which is what it did in the past quite brilliantly. This time around, the credit system is in much better shape, I think the economy is much more resilient to tighter monetary policy, and that we’re likely to get a soft landing in which inflation moderates.
Having said that, I’m giving 60% to a soft landing, and 40% to a hard landing next year.
How do you think the Fed will adjust monetary policy moving forward?
EY: They can either continue to tighten until they cause a recession, but that’s not my most likely scenario. I’ll give it a 40%. That would mean they’ve concluded the only way to bring inflation down is with a recession.
Another scenario is that they’re close to the so-called terminal rate, but will keep it there for most of next year, and that there won’t be actual easing until 2023, 2024.
Then, of course, there’s the possibility that all hell breaks loose and inflation remains persistent, there’s geopolitical issues, and we find that the amount of tightening that’s occurred so far that all, one way or another, add up to a pretty nasty recession.
I think either rates are going to go higher, causing a recession, which would bring interest rates down next year. Or else it’s going to be a scenario where rates are going to just go sideways for a while and that’ll relieve a lot of inflationary pressures and move through with a soft landing.
What’s your stock market outlook for 2023?
EY: I think earnings are going to grow. I don’t see the freefall in earnings that we got during the lockdowns or great financial crisis. The problem is valuation multiples are still high.
But I do think we’ll be making new highs by the end of next year, something around 4,800 [for the S&P 500]. But I think the valuation multiples are going to continue to be problematic in terms of getting a rip-roaring momentum, bull market.